Lingering energy subsidy system is fundamentally wrong

Lingering energy subsidy system is fundamentally wrong

TEHRAN - Inexpert decisions coupled with populist policies have led to alarming energy consumption at the cost of the environment, public health, waste of natural resources, and drain of national wealth.

Now it has become more and more difficult to address problems resulting from inexpert and populist policies in energy consumption. Unfortunately, energy consumption is under the influence of politics rather than economics.

Some decision-makers, including former and current parliamentarians and presidents, were and are still proud of themselves for standing against reducing, not cutting, energy subsidies, especially petrol. They were and are still ignorant of the fact that the harms of subsidized energy far outweigh its benefits.

Successive parliaments are more responsible for the current situation. For example, the sixth parliament (2000-2004) voted for a legislation according to which the petrol price had to rise to the international market level within five years. However, the next parliament rescinded the legislation and boasted of its move.

This anti-justice energy subsidy system, which has been going on for decades, goes against the principles that the Islamic Republic claims it stands for. The subsidy is mostly going to those who consume more petrol, natural gas, electricity or other types of energy.

Houshang Falahatiyan, the deputy oil minister for planning, said in January 2024 that Iran annually pays between 80 to 100 billion dollars in energy subsidies.

Among the energy commodities petrol and diesel are heavily subsidized. Subsidizing diesel is somehow justified because it is important for transportation. But subsidizing petrol and natural gas is simply wrong and detrimental which has caused back-to-back problems.

Keeping petrol prices unreasonably low while the annual inflation rate has been around 40 percent has wreaked havoc on the economy.

Now petrol is much cheaper than drinking bottled water.

On August 27, 2024, just a few weeks after Masoud Pezeshkian took over as president, he said his government did not have enough money to pay for wheat bought from farmers, pay pensions for retirees, etc. Still, energy, especially petrol, is subsidized heavily.

President Pezeshkian has said producing one liter of petrol costs 8,000 tomans (around 12 cents) without computing the oil price.

Now, 60 liters of petrol are sold to each car at a price of 1500 tomans (around 2 cents) per liter and more than that 3,000 tomans (around 4 cents). Some citizens who own more than one car are now benefiting much more from this unlimited subsidy system and the poor classes of society who have no car are deprived of it.

This wrong policy has led the use of petrol to reach the astonishing level of 122 million liters per day and is still increasing.

Pezeshkian said this year we must allocate 90,000 billion tomans (around 1.3 billion dollars) for importing petrol.

After petrol, the extravagant use of natural gas comes second in draining national wealth. Director of National Iranian Oil Company Saeed Tavakoli said in Dec. 2024 that Iranians consume natural gas 3.3 times more than the global average.

In terms of natural gas consumption, Iran comes after the U.S., Russia and China.

It is true that Iran has the second-largest proven gas reserves in the world and according to the U.S. Energy Information Administration (EIA) has the third-largest proven crude oil reserves, citizens must be made aware that unchecked consumption will harm the country economically and healthily and these resources will be depleted sooner than expected.   

Energy price vs basic commodities

Now the prices of basic commodities such as cooking oil, rice, meat, beans, etc. are increasing in parallel with the inflation rate, which is about 40 percent. However, some officials raise eyebrows whenever there is talk of decreasing the petrol subsidy.

At a time when an important percentage of families live under the poverty line and are forced to deal with rising prices paying tens of billions of dollars to energy commodities is self-defeating. 

There is a counterargument that if people use petrol at a low price, they pay much more for buying a car in comparison to international markets, and the cars produced by local auto companies are fuel-inefficient. Undoubtedly, this argument is correct, but who is responsible?

Auto companies also campaign against importing cars – even second-hand cars - by saying many jobs will be lost. But, the billions of dollars that are being wasted for subsidizing petrol can create hundreds of thousands of jobs.

Summarily speaking, auto companies with the support of some influential persons or lobbyists have created a monopolized market for themselves and even don’t try to lower the fuel consumption of their products or improve the quality of their products.

Junking old cars as one of the main sources of air pollution is also done at a low speed.

Health effects

The harmful environmental effects of this destructive subsidy system must not be underestimated or ignored.

Abbas Shahsavani, the chief of the air quality of the health ministry, said on January 18 that more than 30,000 people died from air pollution during the calendar year 1402 (March 2022-March 2023), Tasnim reported.

This figure may not be precise but the number of citizens who fall victim to air pollution is high. Shahsavani also said the cost of air pollution in 1402 was 600,000 billion tomans (around 9 billion dollars).

This energy policy is first and foremost self-defeating.

Cheap petrol prices have led to wasteful consumption and production of fuel-inefficient passenger cars.

In January 2024, Falahatiyan said about 1 million cars are added to the transportation fleet per year and their fuel consumption is 40 percent higher than cars produced in the world.

Whenever there is talk of a change in petrol price many decision-makers immediately react and say it leads to price rises in other commodities, including transportation. However, without any rise in petrol prices since November 15, 2019, which led to protests prices have kept regularly increasing.

Nasser Ashouri, the secretary of the Employer Association in the Refining Industry, told a press briefing in May 2024 that Iran imported about 3 billion dollars of petrol in the national calendar year 1402 (March 2022-March 2023). Ashouri said Iran, a country with the third largest proven oil reserves, is forced to import petrol due to wasteful consumption.

Ashouri also said, “We will face a shortage of all kinds of energy including water, electricity, natural gas, and petrol.” However, his prediction came true earlier as the country is now grappling with the shortage of electricity and natural gas with the onset of the cold season.

Iran has again resorted to importing petrol while it inaugurated the Setareh Khalij Fars Refinery in Feb. 2019 which added 45 million liters of petrol to the country’s production capacity per day.

Old-rooted problem 

Speaking at the Parliament’s Energy Committee on January 5, Oil Minister Mohsen Paknejad said, “Basically, when there are talks of energy shortage all should notice that this issue is not related to the past five or six months but it is rooted in” years of excessive use of energy in the country.

“It is for years energy has been produced unstoppably but the pace of consumption…, and efficient use has been abandoned and consumption is on the rise speedily,” he told the committee members attended by Parliament speaker Mohammad Bagher Ghalibaf and Energy Minister Abbas Ali-Abadi.

Even Pezeshkian who was a strong critic of the rising petrol consumption and its price made no changes in petrol price when he presented the national budget bill to parliament for the new Iranian calendar year that begins on March 20.

The parliament is also relinquishing its responsibility in this regard and says it is up to the government to decide about the price.

The ever-increasing energy consumption, especially petrol, is like an iceberg that is becoming more destructive over time if a remedy is not found.

There is a concern that if the price of petrol is increased it may lead to an unrest similar to Nov. 2019. But there are solutions to this potential problem:

Provide a situation in which customers would buy standard cars with prices at the level of the international market; import electric vehicles; improve the public transport fleet; sign contracts with foreign companies to produce electric cars inside Iran (like the contract that Turkey has signed with China’s BYD company); release prices in a gradual way; and more importantly convince people about the health and economic costs of the current subsidy system and assure people that the dividends from petrol prices will benefit the society.

*(Calculation is based on 68,000 tomans per dollar)

source: tehrantimes.com